4-28 Barbara Whitley had great expectations about her future as she sat in her graduation ceremony in May 2010. She was about to receive her Master of Accountancy degree, and next week she would begin her career on the audit staff of Green, Thresher & Co., CPAs. Things looked a little different to Barbara in February 2011. She was working on the audit of Delancey Fabrics, a textile manufacturer with a calendar year- end. The pressure was enormous. Everyone on the audit team was putting in 70- hour weeks, and it still looked as if the audit wouldn’t be done on time. Barbara was doing work in the property area, vouching additions for the year. The audit program indicated that a sample of all items over $ 20,000 should be selected, plus a judgmental sample of smaller items. When Barbara went to take the sample, Jack Bean, the senior, had left the client’s office and couldn’t answer her questions about the appropriate size of the judgmental sample. Barbara forged ahead with her own judgment and selected 50 smaller items. Her basis for doing this was that there were about 250 such items, so 50 was a reasonably good proportion of such additions. Barbara audited the additions with the following results: The items over $ 20,000 contained no misstatements; however, the 50 small items contained a large number of misstatements. In fact, when Barbara projected them to all such additions, the amount seemed quite significant. A couple of days later, Jack Bean returned to the client’s office. Barbara brought her work to Jack in order to apprise him of the problems she found and got the following response: “ Gosh, Barbara, why did you do this? You were only supposed to look at the items over $ 20,000 plus 5 or 10 little ones. You’ve wasted a whole day on that work, and we can’t afford to spend any more time on it. I want you to throw away the schedules where you tested the last 40 small items and forget you ever did them.”
When Barbara asked about the possible audit adjustment regarding the small items, none of which arose from the first 10 items, Jack responded, “ Don’t worry, it’s not material anyway. You just forget it; it’s my concern, not yours.’’ a. In what way is this an ethical dilemma for Barbara? b. Use the six- step approach discussed in the book to resolve the ethical dilemma.
Click here for the solution: Barbara Whitley had great expectations about her future as she sat in her graduation ceremony in May 2010
Showing posts with label she. Show all posts
Showing posts with label she. Show all posts
Friday, August 14, 2015
Thursday, August 13, 2015
Stacy Cummins, the newly hired controller at Merced Home Products, Inc., was disturbed by what she had discovered about the standard costs at the Home Security Division
Case 11-22 (Ethics and the Manager; Rigging Standards) Stacy Cummins, the newly hired controller at Merced Home Products, Inc., was disturbed by what she had discovered about the standard costs at the Home Security Division. In looking over the past several years of quarterly income statements at the Home Security Division, she noticed that the first-quarter profits were always poor, the second-quarter profits were slightly better, the third-quarter profits were again slightly better, and the fourth quarter always ended with a spectacular performance in which the Home Security Division managed to meet or exceed its target profit for the year. She also was concerned to find letters from the company’s external auditors to top management warning about an unusual use of standard costs at the Home Security Division.
When Ms. Cummins ran across these letters, she asked the assistant controller, Gary barber, if he knew what was going on at the Home Security Division. Gary said that it was common knowledge in the company that the vice president in charge of the Home Security Division, Preston Lansing, had rigged the standards at his division in order to produce the same quarterly income pattern every year. According to the company policy, variances are taken directly to the income statement as an adjustment to cost of goods sold.
Favorable variances have the effect of increasing net operating income, and unfavorable variances have the effect of decreasing net operating income. Lansing had rigged the standards so that there were always large favorable variances. Company policy was a little vague about when these variances have to be reported on the divisional income statements. While the intent was clearly to recognize variances on the income statement in the period in which they arise, nothing in the company’s accounting manuals actually explicitly required this. So for many years Lansing had followed a practice of saving up the favorable variances and using them to create a nice smooth pattern of growing profits in the first three quarters, followed by a big “Christmas present” of an extremely good fourth quarter. (Financial reporting regulations forbid carrying variances forward from one year to the next on the annual audited financial statements, so all of the variances must appear on the divisional income statement by the end of the year.)
Ms. Cummins was concerned about these revalations and attempted to bring up the subject with the president of Merced Home Products, but was told that “we all know what Landing’s doing, but as long as he continues to turn in such good reports, don’t bother him.” When Ms. Cummins asked if the board of directors was aware of the situation, the president somewhat testily replied, “Of course they are aware.”
Required:
1. How did Preston Lansing probably “rig” the standard costs – are the standards set too high or too low? Explain.
2. Should Preston Lansing be permitted to continue his practice of managing reported profits?
3. What should Stacy Cummins do in this situation?
Click here for the solution: Stacy Cummins, the newly hired controller at Merced Home Products, Inc., was disturbed by what she had discovered about the standard costs at the Home Security Division
When Ms. Cummins ran across these letters, she asked the assistant controller, Gary barber, if he knew what was going on at the Home Security Division. Gary said that it was common knowledge in the company that the vice president in charge of the Home Security Division, Preston Lansing, had rigged the standards at his division in order to produce the same quarterly income pattern every year. According to the company policy, variances are taken directly to the income statement as an adjustment to cost of goods sold.
Favorable variances have the effect of increasing net operating income, and unfavorable variances have the effect of decreasing net operating income. Lansing had rigged the standards so that there were always large favorable variances. Company policy was a little vague about when these variances have to be reported on the divisional income statements. While the intent was clearly to recognize variances on the income statement in the period in which they arise, nothing in the company’s accounting manuals actually explicitly required this. So for many years Lansing had followed a practice of saving up the favorable variances and using them to create a nice smooth pattern of growing profits in the first three quarters, followed by a big “Christmas present” of an extremely good fourth quarter. (Financial reporting regulations forbid carrying variances forward from one year to the next on the annual audited financial statements, so all of the variances must appear on the divisional income statement by the end of the year.)
Ms. Cummins was concerned about these revalations and attempted to bring up the subject with the president of Merced Home Products, but was told that “we all know what Landing’s doing, but as long as he continues to turn in such good reports, don’t bother him.” When Ms. Cummins asked if the board of directors was aware of the situation, the president somewhat testily replied, “Of course they are aware.”
Required:
1. How did Preston Lansing probably “rig” the standard costs – are the standards set too high or too low? Explain.
2. Should Preston Lansing be permitted to continue his practice of managing reported profits?
3. What should Stacy Cummins do in this situation?
Click here for the solution: Stacy Cummins, the newly hired controller at Merced Home Products, Inc., was disturbed by what she had discovered about the standard costs at the Home Security Division
Saturday, July 11, 2015
Jackie pays $20 every time she visits her doctor
1) Jackie pays $20 every time she visits her doctor. She is covered by a(n)
2) If your employment is terminated, COBRA provides for
3) Ben's health coverage charges a low ($15) deductible each time he visits the doctor or hospital. Other than the low per-service deductible, there is very little cost sharing. However, Ben must go to the health care providers listed by the provider of the health coverage. If he goes to a provider that is not on the list, there is very little coverage. Which of the following types of entity most likely provides Abe's health coverage?
4) All property insurance companies require you to show the following when making a claim:
5) Given a $500 annual deductible, a $4,000 lid on the coinsurance, 80/20 coinsurance, and a $250,000 policy limit, how much of a $15,000 medical bill will be paid by the insured?
6) Disability income policies usually have ____ that is a time delay from the date of the issuance of the policy until benefit privileges are activated.
7) Which of the following best describes a "pre-existing condition"?
8) The insurance designed to help with nursing home or in-home care due to chronic illness is called
9) Surgical expenses now generally are reimbursed on the basis of
10) All of the following except a ____ are highly recommended for a long-term disability income policy.
11) A comprehensive major medical insurance would not
12) Some common liability risks include:
13) A liability suit could result when
14) Homeowners' insurance premiums are determined by
15) Supplementary Medical Insurance (SMI) provides health care protection beyond basic hospital coverage for
16) Medicare is a government-sponsored health care plan composed of Part A and Part B. Part A covers
17) Your son left his skateboard at the bottom of the basement stairs. While going downstairs to change a broken light bulb, you step on the skateboard and break your ankle during the fall. Medical damages total $1,455. How much will your $140,000 homeowners' insurance policy pay for this accident? The policy has $100,000 comprehensive liability coverage and medical payments of $1,000/person.
18) Your standard HO policy will not include coverage for damage done by
19) Negligence results when a person
20) Many airline passengers purchase a special life insurance policy frequently sold at the airport. This is an example of a(n) ____ policy.
21) Which of the following events would probably increase your auto premiums?
22) Homeowner's property insurance does not provide protection on the
23) Suppose a person has a health insurance policy with a $500 calendar year deductible, a $2,000 out-of-pocket cap, and an 80% coinsurance provision. If this person suffers a $600 covered loss, how much will the insurance company pay? (Assume no previous losses have occurred.)
24) Social security provides health care coverage to persons age ____ and those who are ____.
25) Donna, who is single and 30-years-old, has received several speeding tickets recently and was shocked by the effect on her auto insurance. Donna drives a 2002 Pontiac Firebird, is currently not covered by health insurance, has an emergency fund of $25,000, an income of $100,000 per year, and an investment portfolio of $230,000. She is trying to reduce the price of her auto insurance. Which of the following actions is most likely to be advisable.
Click here for the solution: 1) Jackie pays $20 every time she visits her doctor
2) If your employment is terminated, COBRA provides for
3) Ben's health coverage charges a low ($15) deductible each time he visits the doctor or hospital. Other than the low per-service deductible, there is very little cost sharing. However, Ben must go to the health care providers listed by the provider of the health coverage. If he goes to a provider that is not on the list, there is very little coverage. Which of the following types of entity most likely provides Abe's health coverage?
4) All property insurance companies require you to show the following when making a claim:
5) Given a $500 annual deductible, a $4,000 lid on the coinsurance, 80/20 coinsurance, and a $250,000 policy limit, how much of a $15,000 medical bill will be paid by the insured?
6) Disability income policies usually have ____ that is a time delay from the date of the issuance of the policy until benefit privileges are activated.
7) Which of the following best describes a "pre-existing condition"?
8) The insurance designed to help with nursing home or in-home care due to chronic illness is called
9) Surgical expenses now generally are reimbursed on the basis of
10) All of the following except a ____ are highly recommended for a long-term disability income policy.
11) A comprehensive major medical insurance would not
12) Some common liability risks include:
13) A liability suit could result when
14) Homeowners' insurance premiums are determined by
15) Supplementary Medical Insurance (SMI) provides health care protection beyond basic hospital coverage for
16) Medicare is a government-sponsored health care plan composed of Part A and Part B. Part A covers
17) Your son left his skateboard at the bottom of the basement stairs. While going downstairs to change a broken light bulb, you step on the skateboard and break your ankle during the fall. Medical damages total $1,455. How much will your $140,000 homeowners' insurance policy pay for this accident? The policy has $100,000 comprehensive liability coverage and medical payments of $1,000/person.
18) Your standard HO policy will not include coverage for damage done by
19) Negligence results when a person
20) Many airline passengers purchase a special life insurance policy frequently sold at the airport. This is an example of a(n) ____ policy.
21) Which of the following events would probably increase your auto premiums?
22) Homeowner's property insurance does not provide protection on the
23) Suppose a person has a health insurance policy with a $500 calendar year deductible, a $2,000 out-of-pocket cap, and an 80% coinsurance provision. If this person suffers a $600 covered loss, how much will the insurance company pay? (Assume no previous losses have occurred.)
24) Social security provides health care coverage to persons age ____ and those who are ____.
25) Donna, who is single and 30-years-old, has received several speeding tickets recently and was shocked by the effect on her auto insurance. Donna drives a 2002 Pontiac Firebird, is currently not covered by health insurance, has an emergency fund of $25,000, an income of $100,000 per year, and an investment portfolio of $230,000. She is trying to reduce the price of her auto insurance. Which of the following actions is most likely to be advisable.
Click here for the solution: 1) Jackie pays $20 every time she visits her doctor
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